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FROM BEHIND THE PAYWALL

First published in February 2017.

09 February 2017 - 07:21

The rot inside the national power utility and the secret report Eskom doesn't want you to see

ESKOM REPRIMAND

Eskom complained to the Press Ombud about a series of articles in this magazine, alleging 25 infractions of the code of ethics and conduct. The Ombud dismissed 22 of these complaints and found against the Financial Mail on three issues. The magazine was reprimanded for omitting to balance the reference to “questions over the rationale for load-shedding”, without explaining what this rationale was, as well as for inaccurately saying information about names being removed from the Dentons report was “corroborated by the minutes”, and that Dentons had to be convinced to write a letter saying it found no wrongdoing. In fact, this information was obtained from other sources.

The Ombud did say, however, that the Financial Mail “did its job and acted as a watchdog”. He said Eskom had reneged on its promise to release the report and has only itself to blame should a reader believe that Eskom wanted to cover up information.

Eskom’s claim that electricity tariffs are too low is hardly credible, says an uncensored report into the mess at the power utility. Among the problems it uncovered is that too many in management seemed far more focused on leveraging Eskom’s vast buying power for their self-interest, rather than to drive efficiencies.

Eskom this week decided it would not release a long-awaited report into the parlous state of the power utility after all. This was a major U-turn after it had earlier invited the media, promising to release the two-year-old report that would reveal the root cause of its operational and financial meltdown in 2015, as well as shed light on the inordinate delays and cost overruns at its new power stations.

However, the Financial Mail has seen three different iterations of the final report, compiled by law firm Dentons, and has been briefed on an earlier interim report. Given the damning findings, it’s evident why the Eskom board were keen to keep it under wraps — until leaks from within made it impossible to maintain the cover-up.

The story is this: In May 2015 Dentons presented an interim report to the board, which was explosive, according to those who saw it. It contained, for example, awkward details about how certain Eskom executives and senior managers allegedly diverted contracts to themselves or their families, to the ultimate cost of the taxpayer.

For the first time on Tuesday, Ngubane acknowledged the probe had been stopped in its tracks. Asked why, he spoke of a “trade-off between continuing with a prolonged investigation” and getting on with fixing things.

Ben Ngubane: Acknowledged the probe had been stopped in its tracks. Picture: FREDDY MAVUNDA

Continuing with the probe would demoralise staff in an already depressed company, and the board chose to implement recommendations from previous probes. Eskom was also running out of money to pay its 49,000 employees. So it informed public enterprises minister Lynne Brown and cancelled the probe in June.

The reports seen by the Financial Mail paint a picture of a company in serious trouble, with the rot starting right at the top. They also cast serious doubt on the arguments Eskom advanced publicly for why it had to raise electricity prices so steeply.

Dentons reported that Eskom employees told investigators how directors and senior executives had, in some cases, positioned themselves to benefit personally from coal deals — a key part of the operation — entered into on behalf of Eskom. It was the same story in its logistics division, where Eskom did not introduce competitive tendering processes for the delivery of coal to its power stations. In some cases, this meant the delivery of coal ended up costing about half the price of the coal itself. In one case, a company sold Eskom R4.2m worth of coal, but the cost to transport it from a nearby mine was another R2.6m. Another R5m was added to the bill as a “coal penalty adjustment”. The bottom line: Eskom paid R13.4m, including Vat, for just R4.2m worth of coal.

This, Dentons says, did not support Eskom management’s argument that it contained costs each time it asked for higher electricity tariffs.

Rationale for load-shedding questioned

“Moreover, various officers have provided to us verbally examples of senior executives seeking opportunities ostensibly for the benefit of themselves at the expense of Eskom; denying Eskom a path to vertical integration of key suppliers, making deals with suppliers outside of the formal procurement process, and/or turning a blind eye to expensive contract breaches,” an early, less sanitised version of the report states.

The Dentons report also raises new questions over Eskom’s rationale for load-shedding. Dentons said there had been no significant increase in electricity demand for five years from 2008.

Yet it was during this period that the country was subjected to daily load-shedding that cost the economy billions of rand — R438m/day, according to Ngubane.

In 2012 demand was marginally above that of 2008, while from 2013 to 2015, demand only matched 2010 levels during the Soccer World Cup. Today, Eskom produces less power than it did during its highest-ever demand period — 2007. Acting CE Matshela Koko said on January 24 that “there was lower demand”.

Dentons points out that from 2007, coal prices fell on average by 50% from US$120/t to around $60/t in 2015. Yet Eskom’s coal bill grew by 18%/year from 2006.

Investigators questioned why this was so, given Eskom’s considerable buying power which should have allowed it to secure low prices. “In nominal rand terms, coal prices have remained the same for the past four years. More recently (since November 2013) prices have declined from R855/t to R720/t.”

Dentons’ killer punch

The problem was Eskom’s failure to subject the logistics to a competitive tendering process. Also, corruption: management diverting opportunities to themselves at the expense of Eskom and the consumer.

Dentons’ killer punch, diplomatically delivered, was this line, in one of its earlier reports: “If management’s energies are centred on leveraging Eskom’s considerable buying power for self-interest, rather than to drive efficiencies, the notion that the tariff is not cost-effective loses credibility.”

In the final “official” version, this part has been watered down to refer vaguely to a need to check whether there are any conflicts of interest with management.

But in earlier versions, it was more direct. “There is a significant list of examples of questionable procurements, and poor contract management, even including areas that should be in the spotlight, such as ad hoc arrangements with suppliers of diesel not subjected to discounts despite the purchasing power Eskom has,” Dentons said.

The law firm is assiduous in all versions of the report to place on record that it was prevented from finalising its probe, which was cut off after 45 days, despite Eskom board minutes acknowledging at the outset that the probe could take up to 12 months.

'If made public, Eskom would again be leaderless'

Still, it seems Dentons reached a finding that there was evidence of illegal behaviour — one reason why Eskom might want the report buried.

“There would appear to be prima facie indicators based on the above that Eskom breached the treasury regulations pursuant to the Public Finance Management Act, 1999, and therefore contributed to its own financial challenges,” it said.

While the Financial Mail has seen a number of versions of the report, there was an earlier “interim report” which the Eskom board ordered recalled from everyone who saw it, and then destroyed. It is this version that named guilty parties.

Lynne Brown: Eskom informed her it would cancel the probe. Picture: BUSINESS DAY

Minutes from the August 14 Eskom board meeting, seen by this magazine, state that all copies of that report must be destroyed within seven days. In those same minutes, the board also seemed surprised the report was incomplete: “Members took cognisance that Dentons had concluded their investigation earlier than the time frame.”

Two nonexecutive directors who were briefed and read this interim report, as well as a current official and two former officials who were briefed on its contents, told the Financial Mail that if that version is made public, Eskom would again be leaderless — as the culprits would surely face disciplinary action.

Instead, the board ignored the allegations by its own employees, retaining those accused of sabotaging the company. This put the livelihoods of 49,000 staff at risk, and heightened the odds of a national electricity blackout.

Political influence

On the new infrastructure build, Eskom does not come out smelling of roses in the Dentons inquiry either.

One of their earlier reports reveals that political influence was brought to bear on Eskom in how it divvied up contracts to build the new power stations, Medupi and Kusile. “There appears to be inconsistent treatment of contractors. For example the Alstom contract for the boiler control system was cancelled due to the system failure, but the services of Hitachi were retained in spite of its nonperformance in respect of the boiler tube welding,” it said.

Hitachi was controversially granted an Eskom contract, even though one of its shareholders was the ANC’s front company Chancellor House. At the time, Eskom’s then-chairman Valli Moosa served on the ANC’s national executive and was party to the organisation’s fund-raising efforts.

Building those power stations took five years longer than expected, while the costs more than doubled from the initial estimates. While partly due to delays, this was also due to changes in the project plans.

Yet, in the sanitised report finally adopted as the official one, Eskom made sure that any reference to Hitachi, or allegations of its executives diverting business opportunities to themselves or their relatives, had been expunged.

Other findings in the suppressed reports include:

Delays to its plans to build new power plants were caused by Eskom setting unrealistically aggressive timelines for the development of the new baseload projects, in an attempt to meet the new revised forecast of supply shortfalls;

It appears Eskom did not follow competitive tendering for its suppliers;

Eskom got it wrong when it initially told government it would need new generating capacity only by 2012 — when, in fact, new infrastructure had to be operational four years earlier;

A number of project preparation processes were fast-tracked or not carried out;

No proper feasibility study was conducted to ensure all technical, commercial and environmental hurdles were identified and mitigated. Some of the issues arising from the construction phase should have been identified during the feasibility stages;

On occasion there appeared to be differences in the way the executive committee presented some financial information to the board. Yet, the board rarely appeared to raise challenges to financial issues. “Access to further information may shed light on this.”

The Dentons report presented a snapshot of what was taking place in perhaps SA’s most important state-owned company during a time of load-shedding crisis. But instead of digging deeper, Eskom terminated Dentons’ mandate and tried to suppress that information.